A new financial institution set up by the UK government to finance charities and community groups has been launched.

Big Society Capital has £600m, of which the majority comes from unused cash in bank accounts that had been dormant for more than 15 years.

The fund will back social enterprises that prove they can repay an investment through the income they generate.

"This is about supplying capital to help society expand," said Prime Minister David Cameron.

"Just as finance from the City has been essential to help businesses grow and take on the world, so finance from the City is going to be essential to helping tackle our deepest social problems," the prime minister added.

It is a bit of a drop in the ocean, given what is happening to the sectorDan Corry, Chief executive of New Philanthropy Capital

Prisoners

Venture capitalist Sir Ronald Cohen, who is Big Society Capital's chairman, told the BBC that the fund's aim was to create a "thriving market for social investment".

He explained that many not-for-profit organisations relied on donations to finance themselves, and were unable to get a normal loan from a High Street bank because they lacked assets - such as property - that could be offered as a security.

The idea is to help out businesses that provide a benefit to society much greater than the profits they make.

If Big Society Capital does fulfil its promise, it will do no harm to the reputation of politicians and of bankers

By Mark EastonHome editor

"It will allow an organisation which today is trying to deal for instance with prisoners who are being released and ending up in unemployment then back in prison... to get the capital to increase the size of their organisation and to improve the lives of these prisoners," he added.

Mr Cohen explained that some of the return on the fund's investments would be paid by the government, which would give the fund a cut of any savings the Treasury made thanks to the charitable work.

For example, in the case of prisoners, if the scheme was shown to have reduced the reoffending rate of participants, then the government would pay the fund some of the money it had saved on locking them up, policing and healthcare.

theCommunity Generation Fund, which supports the development of renewable energy infrastructure, such as solar panels and biomass boilers, for local communities.

'Mask'

However, the importance of the new scheme should not be "over-hyped", according to Dan Corry, chief executive of New Philanthropy Capital and a former adviser to Gordon Brown.

Case study

HCT Group is a social enterprise that offers school buses, park-and-ride facilities and some London bus services. Chief executive Dai Powell explains how it works:

"Social enterprise is a business that trades primarily for social purpose.

"We work in the market, we have to win contracts against the big commercial players, the only difference is what we do with the profits.

"[Big Society Capital] would enable organisations like ours [to grow]. In our sector, there hasn't traditionally been the same levels of finance as there has been in the corporate sector.

"The criteria on the investment is both social and financial. We can default on the investment if we don't provide the social aim.

"If we are very successful, we will pay between 10% and 13%... to the social investment fund, where the money will go back into social enterprise."

"I think Big Society Capital is a good thing, but it is a limited amount of money and it is a bit of a drop in the ocean, given what is happening to the sector, with the deficit-reduction programme really hitting the sector," he told BBC Radio 4's Today programme.

"It will mask the real problem: voluntary organisations who really do need grants and won't be able to cope with risk capital."

Mr Corry said that although there were many social enterprises that would benefit from the scheme, many charities would not, because they had no revenue stream that could be used to repay the funding.

"A lot of charities who are helping homeless people, for example, they don't get any revenue from that," he said. "For most of them, this is really quite irrelevant."

Labour's shadow minister for the cabinet office, Jon Trickett, welcomed the scheme, but said it needed to be viewed within the context of the pain caused by government spending cuts.

"The government should not over-claim at a time when over 70,000 jobs in the sector have been lost in the last year alone," he said.

"The voluntary and community sector stands to lose an estimated £1.2bn per year for the rest of this Parliament."

'Encourage charities'

The new investment fund is independent of the government and 60% of its shares are owned by the Big Society Trust, a private limited company comprised of executives from social, business and government roles.

The rest of its shares are held by Barclays, HSBC, Lloyds Banking Group and the Royal Bank of Scotland.

The British Bankers' Association (BBA) stressed that people who had unclaimed money in bank accounts would still be able to get it back.

"Cash will be kept back for people who come forward and the BBA's My Lost Account scheme is there to help people search for their funds for free," said Angela Knight, chief executive of the BBA.

"We recognise people's growing interest in how their money is used and we are delighted to have been able to help make Big Society Capital work and enable banks and investors to combine financial return with social good."